How about those Atlanta Braves?! The Braves held the best record in all Major League Baseball, hit the most home runs ever, and sent eight players to the All-Star game, all in the first half of the season. I bring this up for a couple of reasons: (1) my son is a big Braves fan, and I might get him to read this commentary if I tell him it is about the Braves, and (2) the Braves might be the only thing hotter right now than the U.S. stock market.
Simply put, the first half of 2023 was exceptionally good for the markets. The S&P 500 was up close to 17%, and the tech-heavy NASDAQ was up almost 39%. Tech stocks were the all-stars of the year’s first half, with NVIDIA up 189.5%, Facebook up 138.4%, Apple up 49.7%, Microsoft up 42.7%, Google up 36.3% and Amazon up 55.2%. Mid- and small-cap stocks did not perform as well as large-cap but were still up anywhere from 5% to 14%, depending on if you are looking at growth or value stocks. Foreign stocks also performed well in the year’s first half, with the EAFE up 9.66%. The returns on fixed income have been lower than those on equities but still positive, with Barclays Agg returning 2.00%. That’s not bad, considering that the price of fixed income often falls as rates go up, and rates have continued to rise this year, albeit at a slower pace than last year. Cash and cash equivalents (T-Bills, CDs, Money Markets) are returning anywhere from 4%-5%, making them an attractive place to hide from market turmoil.
Why have the markets continued to rally in 2023? First, we must remember that even with the positive returns this year, most stocks are still below where they started in 2022. The main catalysts for the positive returns are (1) inflation continues to fall, with the latest year-over-year reading below 3%, (2) the current unemployment rate (3.6%) indicates that almost every American who wants a job has a job, and (3) most companies associated with AI (artificial intelligence) saw their share prices do very well in the first half.
Will the factors that powered the markets in the first half of the year continue to help them move higher in the second half? Let’s look at them one by one.
- Lower Inflation – This has led to consensus thinking that the Federal Reserve has nearly finished hiking rates. That could very well be the case, but falling inflation may be nearing its end. Year-over-year inflation is unlikely to continue declining, as the prior year’s inflation will be evaluated from a lower starting point. Overall, I do not think inflation and interest rate movements will be the same catalyst for market returns (good or bad) as they have been in 2022 and throughout the first half of 2023.
- Unemployment Rate – With a remarkably low unemployment rate of 3.6%, I cannot imagine future numbers will show anything but increasing unemployment, so it is unlikely to be a primary reason for markets to push to new heights for the remainder of the year.
- AI – Artificial intelligence is not going anywhere. It could be a game changer, much like the internet was in the ‘90s, but as far as a market mover in the short term, it is not so clear. Valuations of companies promoting AI are sky-high. This is not to say they are at their highest, but they may not be the market mover they were in the first half of the year.
If not for the above reasons, what could cause the markets to continue their upward climb?
- Corporate Earnings – Earnings could continue to come in above estimates and offer strong guidance. This is not out of the realm of possibility, especially if consumers continue to spend.
- Investments in Lagging Sectors – The market has seen impressive returns year-to-date, but mostly in large-cap tech stocks. If money flows to other sectors (from cash not invested), that could push the market higher.
- A Conclusion to the War in Ukraine – Unfortunately, this one is a long shot.
What risks do we see as we enter the second half of 2023?
- Decreases in Inflation are Transitory – Inflation could begin to rise again, leading the Federal Reserve to continue hiking rates.
- Higher Interest Rates – Higher interest rates could show the cracks in the commercial real estate market and hurt the bottom lines of banks and others holding the debts of these properties (specifically, insurance companies).
- Geopolitical Risks – These risks could take one of several forms: Russia, China, or even corporate boycotts as a backlash against political activism, once again hurting bottom lines.
Speaking of risks, what are the risks the Braves face the rest of the year?
- Injuries – So far, they’ve been lucky here.
- Return to the Mean – A lot of players have put up numbers that are well above their historical norms.
- Running into a Hot Team in the Playoffs – In baseball, you can play great for 162 games and still run into a hot team at the wrong place and time.
The first half of 2023 is why we continue to preach diversification and taking a long view. Starting off the year, you would have been hard pressed to find an economist not predicting a recession in 2023. This line of thinking would normally lead an investor to decrease their equity holdings in anticipation of that event. Had you done that, you would have missed out on some very positive returns during the first half of 2023. And to most investors’ surprise, that inevitable recession continues to be pushed back further, with many holding the belief that we may not even see a recession this year.
We continue to recommend a portfolio (or portfolios) built to match your short- and long-term objectives. Part of that strategy is selling investments when they outperform and buying into other assets while they are cheap.
Finally, what does all this mean for the Braves? I will do something that I never do when discussing the markets: I predict the Braves will stay hot in the second half of the season, go to the playoffs with the best record of all time, and will be in the World Series by the time I sit down to write the third quarter’s commentary.
– Will Bowen, Relationship Manager
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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